It’s important to restore trust in the stock market

What do you see as the beginning of the stock market? When did you start believing that it was for real?

Everything started with the vouchers. Prior to that, working in the stock market largely amounted to consulting and training – including self-training. In 1993, alongside the vouchers the first funds were created and the market processes began to develop in earnest. And that’s when the real job began. Subsequently, there were a lot of discussions about what the market should be like and how to build it but the first impetus was definitely provided by the vouchers. It seemed at the time that the formation of the stock market was an unstoppable process. Of course, in reality this wasn’t the case. There was also no shortage of political uncertainty. Just the 1996 presidential election alone testifies to that. Moreover, for a long time the market didn’t function properly. For example, in 1998 the government bond market collapsed. Up to that point, government bonds had been the country’s highest-yielding instrument, which is completely absurd from the point of view of a normal market economy.

We saw how in 1993 the stock market started on a path of dynamic development which went on for a long time. But the incremental growth came to a stop. Why?

Russia’s stock market has never experienced stable growth. It’s also been characterized by chaotic movement – two steps forward, one step backwards, and sometimes the other way around. However, I do agree that the general trend until 2007 was positive. But the stock market is not just about trading securities. It actually resembles a living organism in its complexity. In the 1990s, it was important to create a culture of investment. The capital market emerged in place of the state planning committee and it very slowly began to sink in that stocks could bring real profit. Then, at the beginning of the 2000s, people began to sense that by capitalizing their businesses they could make a whole lot more than by living in the gray, not paying taxes and constantly pulling out cash.
The use of promissory notes, barter trade, and cashless forms of exchange, as well as various other schemes started to fade into the past. People’s outlooks became positive. Of course, there were ups and downs as well as unresolved problems – from the question of a central depositary to the problem of insider trading. But these issues were simply due to the fact that the market was not yet completely formed and that was seen as just a matter of time. However, the 2008 crisis exposed all of the fragility of the financial system and brought to light the fact that our market fundamentally depended on foreign investment. Strangely enough, this time we weren’t the ones at fault. But the collapse nevertheless led to a number of unfortunate circumstances. First of all, even though Russia did not suffer from a budget deficit and possessed significant currency reserves – neither of which was the case in 1998 – the country was not left unscathed by the problems in the global markets. Secondly, during the crisis, the main criterion used by clients for choosing a financial institution became not professionalism, but the thought of which firm will be the last to go under. Thirdly, people moved away from any sort of risky operations, choosing instead to hold on to their savings. Fourthly, there was a return to a focus on current cash flow and maintaining control. Capitalization went to the backburner. Finally, all of the above-listed factors were accompanied by a toughening of regulation in the market.
In this situation, it became clear that affiliation with the government was the only way to have a large-scale business in the Russian capital market and that the financial industry would not be able to survive in its previous form. Serious changes await, changes connected first and foremost with regulation, not even so much in our country as on a global level.

So in your view, the crisis of 2008 – not our own regulations or government policy for state corporations – is the main reason why the market today isn’t the way we want it.

The supremacy of state-corporations in China, for example, isn’t hindering the development of the market. As strange as it may sound coming from me, the main reason for this is our interconnectedness with the global capital market. In this sense, India, China, and Brazil are much more closed countries. In Russia, there’s the problem of many companies holding assets offshore. As a result, the sentiment of market players – their attitude towards what is going on – is very important. The stock market is a service industry. We help clients either place their money or raise money. In both cases, what people want has changed; they have stopped looking to trade and have started seeking a more reliable way to earn. At the same time it has become harder to raise money because people were frightened, seeing that even financial behemoths like Lehman Brothers could crumble in an instant. The overall volume of business contracted confidence in the market declined.

What would you identify as the main successes and mistakes of the twenty years of the market economy in Russia?

I consider the creation of the RTS to be a huge success. The development of commonly-accepted “rules of the game” was also a major accomplishment. A good example of this was the crisis of 1998 when nearly all small brokerage companies who were not in the banking sector conducted settlements among themselves and with their clients. And the default rate among such companies turned out to be minimal. And this despite the fact that in the 1990s, trades were made by phone and there were no contracts. So you did not particularly have to adhere to the law. Nevertheless, 97% of the time people did the right thing. Unlike the banking sector, which was in a constant state of conflict, there was practically no enmity among brokerage companies. This is a clear example that if you act in a civilized manner, in accordance with the market, you can be successful, even in Russia’s difficult environment.
One of the biggest failures was that we didn’t manage to maintain market relations on the level that had been achieved between 2004-2006, when business owners understood that the stock market was turning into the primary source of capital and was much more profitable than banks. This was not maintained, however, and to a large extent the lack of mechanisms to defend property rights is at fault. As a result, today there isn’t a single truly public company in the country. Everywhere there’s a majority stakeholder with at least 51%. But the biggest failure, which continues to this day, is the lack of a class of domestic investors. Without such a group, the stock market simply can’t exist. Neither the pooled investment industry nor the pension reform has managed to create such a class. For comparison’s sake, in Russia only around one million people invest in securities, while in the U.S., for example, such investors number over 200 million.
The biggest reasons for this failure are, of course, the incompleteness of regulation and problems with the infrastructure of the market. In this regard, I think that a new wave of change is on the horizon, including on a global level.

Was the decision to sell Troika Dialog to Sberbank connected with the merger of the RTS and MICEX?

Yes.

Was it a condition of the deal?

No, not in that sense. In the situation that unfolded, I understood that it was important to strengthen our business. That is what dictated the decision to sell Troika. In terms of the exchange, there were two primary motives for the merger: first of all, after the wave of mergers and the transformation of many stock exchanges into public companies whose purpose was making money, a lot of our idealistic principles in the vein of the early 1990s were shaken. At that time, we were still enamored with the West and believed that an exchange should be a non-commercial mechanism which operates in the best interests of all market participants. The broker wants a reliable, effective, and cheap system of service. And what does the stockholder want? Maximum profit. To a certain extent, the global trend of turning exchanges into public companies changed my view of our market. I didn’t want to sell Troika to the state and I believed that we could make it into a world-class independent player which would be owned by private investors. Same for the RTS. However, then I saw the global tendency which was moving in the other direction.
The second reason why I agreed to the MICEX-RTS deal was a realization that RTS couldn’t grow without Troika. We always did a huge volume of deals on the RTS which made a big difference to the exchange. I don’t want to offend anybody, but I think that the RTS would have had a very hard time without Troika. As such, the desire to optimize the market had a good purpose.
The sale of Troika Dialog to Sberbank and the merger of MICEX and RTS were two unconnected but parallel instances of business consolidation.

It’s looking like another merger is ahead – the FFMS and the Central Bank of Russia.

Every market has its own model for how much influence the regulator has on the business processes. And each model has its plusses and minuses and various nuances. No model is ideal. The main problem for any regulator is that all of its actions come after the fact. The idea that the regulator can prevent an undesirable progression of events and save us from a crisis is an illusion. I don’t believe, for example, that the American regulator didn’t know that Fannie Mae’s leverage was going off the scale. But business is like water in that it will fill any available space. It’s important not to obstruct it but rather understand how best to direct its flow. But to do that, you need resources, which has always been one of the major problems for the FCSM/FFMS. As such, I feel like the idea of merging them is not unfounded.

Looking back, which of the FCSM/FFMS leaders do you think has made the biggest contribution to the development of the market.

Arkady Volsky was once asked a similar question: who among the leaders of the Soviet Union did he think was the most effective (he worked with a lot of them, from Khrushchev to Putin). He replied, “The current one.” And to the follow-up question of whether the fact of being current had anything to do with his answer, he said completely sincerely, “Of course.”
But in all seriousness, we need to understand that each head of the FCSM/FFMS at any given period in history has been faced with a particular set of tasks and his own particular priorities. As a result, it’s hard to make comparisons. The main problem is always the same: the stock market hasn’t been and continues to not be a priority for the Russian authorities. Clearly, the nation’s leaders are aware of the stock market, but unfortunately they underestimate its fundamental importance to the country’s development. And that has a direct effect on the situation in the market. It’s important to understand that an organism can’t live without a circulatory system. The stock market is the circulatory system for the economy. If it isn’t in place, the economy can’t develop properly, which is what we’re seeing here.

It’s very hard to picture you as a Sberbank functionary, and also hard to believe that you’re simply going to be a professor at SKOLKOVO. And we definitely don’t see you as a retiree. So what’s next for you?

Sberbank’s image and how it actually is in reality are two very different things. Sberbank is not a bureaucratic apparatus, it’s a totally different story. In fact, today Sberbank is the most exciting financial institution in Russia in terms of ambition, capabilities, and the changes which it is currently experiencing. Furthermore, as a person who travels a lot, I can say that today Sberbank is one of the best financial institutions in the world. It has the scale, capabilities and income and most importantly, is a leader with a willingness to make changes. Such a unique combination of qualities in today’s economy is not easy to find among financial institutions. Sberbank has already gone through a lot of transformations, and the potential is there for more, which is exciting. My job is to ensure continuity and the effective merger of the best qualities and practices of the two companies, which I have already been working on for a year and a half. I think that it’s coming along quite well, which I think our clients and employees would confirm.
But nevertheless, I am not going to stay at Sberbank for long, which is something about which Herman Gref and I have reached an understanding. I am an active person and am looking at different possibilities for the future. For example, I plan on remaining on the board of directors of a number of companies – and not only in Russia. It’s an interesting occupation, though it does demand a lot of time. Furthermore, I have a very active role in a bunch of funds (direct, venture, real estate). And finally, charity projects. I have always said that I would like to create a transparent mechanism for raising funds from the middle class – people who aren’t necessarily wealthy but are prepared to contribute some money to charity and want to be sure that the funds will end up making it to those whom the charity is supposed to help. I believe that the renewal of trust in charity is no less important than recovering trust in the stock market. It’s not an exaggeration to say that the lack of trust will have a very harmful effect on the country’s future.